News and Insights

Massachusetts Department of Revenue Determines that Amounts Paid to Use Hosted Software Are Subject to Sales Tax

Tax Development Apr 18, 2011

The Massachusetts Department of Revenue (“the Department”) recently issued a Letter Ruling (LR 11-2), which provides that Massachusetts sales tax is due on charges for the use of software hosted on the seller’s server.

The taxpayer in the Letter Ruling sells subscription access to its Web-based database. The database includes global business and financial information, which allows customers to create customized reports containing trade data, credit scores, legal filings, and general corporate information. For an additional fee, which is generally separately invoiced, customers may also use add-on, Web-based applications to automate credit-approval decisions, manage risk exposure, and create customized credit applications. The add-on applications are hosted on the taxpayer’s server or on a third-party server.

The Department determined that subscriptions to access business and financial information compiled by the taxpayer were nontaxable database-access services under Massachusetts sales and use tax laws. However, because the add-on applications gave customers the ability to enter and manipulate their own information, the purchase of hosted add-on applications was the purchase of a right to use computer software and subject to Massachusetts sales and use tax.


Dennis J. Kolumber, Jr.